1/07/2008 @ 6:00PM

Best And Worst Cities For Renters

Writing a monthly rent check often feels like lighting money on fire. You’ll never again see that cash, you build no equity and there are no tax benefits.

But renting makes sense to those unwilling or unable to buy a home in an uncertain housing market. The number of such Americans seems to be growing; last month mortgage applications fell to their lowest level in a year.

That’s good news for landlords–especially those in New York City and San Francisco. In these cities, tenants pay the highest rents in the country by a significant margin. Those renting a median-level place in the five boroughs can expect to pay $2,922 a month this year. That’s up 6.6% from last year. In the City by the Bay, it’s a more affordable $1,904. Here, though, rents are growing faster than anywhere else; they’re up 7.8% from last year. Renters in Columbus, Ohio, are better off; there, they pay $626 a month.

These numbers were provided by Marcus & Millichap, an Encino, Calif.-based real estate investment firm. Its researchers looked at 2007 year-end rents in America’s 40 largest cities, then estimated 2008 figures based on a combination of vacancy rates, new-construction projects and job growth.

Of the three, vacancy rates most affect price acceleration. In the sales market, a 5% unsold inventory equals a glut, whereas in the rental market, a 5% vacancy rate indicates a healthy market. Areas like Indianapolis, with an 8.6% vacancy rate, experience slower increases than cities like Chicago, which has a 4.5% vacancy rate.

Behind The Numbers

Still, there’s a little more to the figures than basic supply and demand. New York’s 2.8% vacancy rate keeps prices high, of course. But what also plays a role are the incomes of its renters. High home prices keep middle-income and upper-income residents here renting. They can afford, and demand, higher value properties than are rented in other cities. In addition, landlords can charge more, so long as the cost to rent remains significantly below the cost to buy. At the lowest quartile price–the 25% mark–the rents paid by residents in New York, Las Vegas and Charlotte, N.C., are almost identical. It’s as rents head toward the median and to the top quartile that the divergence becomes most striking.

Expected construction also adds a wrinkle to the present rental market. More inventory slows price growth. Cincinnati, for example, is expected to see 100% more new homes this year. As a result, rental prices are only expected to jump 2.7% in 2008, one of the lowest increases nationwide. Now consider Washington, D.C., where a paltry 2% rise in new construction contributes to an expected 5% rise in District rents.

Job growth also affects renters. Salt Lake City has one of the fastest rates of new construction, but it isn’t fast enough to keep up with job growth. A 3.1% uptick in jobs is the highest of any city measured, and the result has been a steady stream of new citizens moving to the city. More jobs, more people and higher wages have lifted prices in both the rental market and sales market there.

Throughout the country, slow sales mean more opportunities for renters as developers and homeowners look to lease their properties while they await hungry buyers. That’s what’s happening in southern Florida as condo developers saddled with excess inventory try their hands in the rental market. But don’t expect to see monthly rents slide; most of Miami’s unsold condos qualify as high-end and don’t compete with much of the rental stock. Miami’s top-flight apartments will see slower rent growth due to the influx, while median-level renters face one of the nation’s tightest rental markets.

By contrast, in Phoenix, where far less of the housing overstock classifies as luxury, the shadow market of newly constructed homes doubling as rentals will have a far greater effect on the traditional rental market, according to Marcus & Millichap, which estimates that rental vacancies will balloon by almost a full percentage point, despite thousands of Phoenix residents moving to the rental market to escape their resetting Alt-A adjustable-rate mortgages.